Indonesia A Regional Outperformer For Drugmakers

With the introduction of a health insurance scheme imminent, demand for medicines will spike.

Market is far more appealing to generic drugmakers and the growth of the domestic industry poses a risk to market-share growth for foreign firms.

Forecasts

As the largest medicine market in South East Asia at IDR94.2trn (USD7.0bn) in 2017, pharmaceutical sales in Indonesia are higher than those in Malaysia and the Philippines combined. We forecast drug sales to rise to IDR300.3trn (USD19.0bn) by 2027.

Indonesia: Positioned Favourably Within South East Asia

South East Asia: Pharmaceutical Sales, USDbn (2017)

Source: Fitch Solutions

Indonesia represents a significant growth opportunity for multinational pharmaceutical firms. It is the largest market in the South East Asia region on an absolute basis and has one of the fastest forecasted growth projections between 2017 and 2027. In addition, while still an underdeveloped market with respect to developed Asia Pacific countries, it is one of the more developed in the South East region, providing both potential for growth and a relatively business-friendly environment. The market's growth will be driven predominantly by the imminent transformation of the healthcare system, which will provide a rapid increase in accessibility to medical services.

Mandatory social health insurance system to boost sales. Government focus on healthcare, highlighted by the objective of achieving universal healthcare by 2019, will significantly improve the outlook of Indonesia's pharmaceuticals and healthcare sector. The scheme will provide free access to healthcare services at the point of use. In addition, it will equalise the current discrepancies in healthcare access in rural and less affluent regions. As such, a significant proportion of healthcare expenses will be placed on the state meaning treatment will become affordable to the wider population and demand for services and medicines will consequently rise.

Positive developments in the pharmaceutical market. In recent years, Indonesia has relaxed FDI laws and announced tax relief policies for pharmaceutical manufacturers, highlighting the country's attempts to improve the operating environment within its pharmaceutical market. Members of the International Pharmaceutical Manufacturers Group (IPMG) in Indonesia, including Novartis, Merck, Bayer, Boehringer Ingelheim and Pfizer, have invested more than USD1bn in the country's pharmaceutical industry over the past few years, particularity for the construction of factories and clinical research. For example, Germany-based Bayer invested EUR8mn (USD9mn) in 2017 into the expansion of its factory in West Java.

Generic drugs will be main beneficiaries of universal healthcare. The market for generic drugs is the largest segment of Indonesia's pharmaceutical industry; a trend which is expected to persist given the roll-out of the country's universal health insurance programme. Once the healthcare scheme is fully implemented, it is predicted that 19% of total healthcare expenditure will be attributed to pharmaceuticals. Of particular relevance will be the market for generic drugs, as the organisation charged with administering the universal health coverage, Badan Penyelenggara Jaminan Sosial (BPJS), has mandated that 92% of drugs on the Essential Drugs List will be generics. BPJS hospitals are also required to focus on generics which will see a surge in the volume of low-cost pharmaceuticals. The government is also encouraging greater use of generic medicines to control costs; and healthcare professionals working in public hospitals are mandated to prescribe generic medicines, whenever possible. While this represents an exceedingly attractive opportunity for generics manufacturers, it poses challenges for revenue streams of innovative drugmakers.

Operational challenges persist. Challenges to multinational pharmaceutical firms exist in Indonesia, particularly for innovative drugmakers. The market is heavily weighted in favour of generic drugs, principally due to the lack of adequate intellectual property protection, as well as a limited ability to afford such high-value medicines, particularly as the country attempts to expand access to healthcare. Moreover, Indonesia's objective of achieving universal healthcare by 2019 will be highly difficult. While significant progress has been made in growing enrolment into the national health insurance scheme (JKN), further expansion will be limited. This is exacerbated by the uneven levels of healthcare access in Indonesia, which is a structural factor that cannot be fully addressed in just two years. In addition, there has been a significant uptick in the growth of the domestic pharmaceutical industry. Domestic firms have expanded production capacity or new firms have been established to produce medicines treating a specific therapeutic area. For instance, the state-controlled pharmaceutical company Kimia Farma has been expanding into the pharmaceutical sector by constructing facilities to produce raw materials for medicines and other pharmaceutical products. Another state-controlled pharmaceutical firm, Kalbe Farma is also currently developing facilities that will curtail the amount of raw materials imported from abroad.